“Just as a teenager can no longer wear the shoes or abide by the restrictions set out for a younger child, a business cannot operate within the structures of its former self.”
Overview
Businesses, like people, start small and move through several stages of growth as they mature. Just as a small child transitions from crawling to walking, with significant consequences for herself and her surroundings, startups and small businesses grow and become more robust and more complex organizations, with their own challenges and consequences.
Comparing a growing child to a business moving through different stages of growth and evolution may seem a bit strange, but there are some real similarities, especially in what I’d like to call growth inflection points. Inflection points are situations or conditions where a child or a business grows and changes to the extent that existing expectations and patterns are no longer relevant. The example of a child moving from crawling to walking is an example. For businesses, a similar change happens as a startup matures and begins rapid growth. Most simply outstrip their previous management systems, technology infrastructure and organizational models.
Inflection points occur in several stages of a company’s evolution, as it shifts from a startup environment to a mid-sized company and to a large highly decentralized or structured enterprise. These inflection points occur where old models and methods threaten to stifle innovation, change and growth, and require that new ways of working must be adopted. Inflection points occur when a company grows at any stage of its business lifecycle, regardless of the nature of the growth. Whether a company grows organically or through acquisition, any company that grows will encounter challenges from existing business models, institutionalized processes, methods, organizational structures, or systems. Changes in critical mass, organizational complexity, the number of connections in the network, or other factors simply require new ways of thinking, executing, and working.
The purpose of this paper is to illustrate some easily observable inflection points and understand what reaching an inflection point will mean for a business. Understanding that inflection points are approaching, or that an inflection point has occurred within a business’ lifecyles, can help leadership teams make well informed decisions about which workplace factors or characteristics to retain, and how to re-think and re-invent the business as it evolves in the future.
What is an inflection point?
We define an “inflection point” as the point in the evolution of a company where growth, change, new capabilities, new demands, or other changes dictate the rethinking and reworking of how a business must operate. As noted above, this growth can be organic or be caused by a merger or acquisition. Regardless of the nature or pace of growth, companies will inevitably reach a point in any growth cycle where existing organizational structures, work processes, computer systems, decision making processes and a host of other business norms must be re-evaluated and rethought. The old phase “what got you here won’t take you there” is trite, but it is also true. During an inflection point, a company’s leadership must rethink how the business must operate to be successful in a future state, not its current state, and reimagine future operations that will drive more growth, demand generation, and enhanced capacity and capabilities. Without undertaking change, a business cannot grow or its next phase of development, because it is restraining itself with increasingly outdated and inadequate processes, systems and organizational structures that worked in the past, but do not fit within a business model for the future.. Just as a teenager can no longer wear the shoes or abide by the restrictions set out for a younger child, a business cannot operate within the structures of its former self.
Keep the best, change the rest
Before we explore what may need to change during different stages of inflection points – and yes, there are several – we ought to point out that not everything needs to change at an inflection point. Concepts like a company’s mission, its vision and values, its core capabilities and other critical components that constitute a company’s culture and distinction must remain intact while other factors such as organizational structure, governance principles, IT systems and other factors should evolve with the business. Because change is uncertain, it is important for a company approaching or moving through an inflection point to make clear to its employees what will remain constant during the transition, and why, and what will change, and the rationale for change. Leadership should be thorough and responsive in communicating its plans for change to employees, Board of Directors, customers, vendors, industry regulators and other stakeholders who have significant influence on the future growth and success of the company.
Three common inflection points
There are at least three common inflection points during a company’s growth as it evolves from a startup to mid-sized organization. While your company may be large and already have moved through its inflection points, it is valuable to reflect upon what was learned at each stage of growth so you are well prepared when future inflection points arise. By studying inflection points, we can identify common issues and needs that will confront your business as it grows.
To clearly illustrate and convey specific business axioms, I will use business headcount size as a method to identify an approaching inflection point.. As the nature of business changes and organizations shift from formal to informal organizations and sometimes back to informal governing structures, from working in an office to a distributed working environment or from a command and control management process to a collegial or collaborative style, inflection points may become less apparent and definitive. How we identify and determine them may become more dictated by issues of connectivity or data than headcount, but for now we’ll use headcount as a determinant.
First inflection point
In our experience at CREO, the first inflection point occurs in an organization once its headcount reaches approximately 50 people. At this point of critical mass, the founder or senior executive responsible for the business has probably hired everyone and until this point has often been responsible for making most of the critical decisions for the business. Companies of this size have few defined business processes because employees interact with each other regularly and people often wear many hats and participate in several functions out of necessity and tenure. For many startups and very small businesses, there are few IT systems and standards other than a financial system, usually Quickbooks or a simple SaaS-based financial application.
As a business approaches 50 people, decision making and role clarity become very important. At this level of critical mass, more employees are interacting with customers and suppliers, and decision making is increasingly shifting from the company founder to a leadership team. To ensure your company’s successful growth through this inflection stage, new processes, policies and especially more robust IT systems must be implemented. Further, decisions and policies that were once informal will increasingly become formalized.
As a company grows through its first inflection point, many must gear up and take on the policies, procedures, organizational charts, and IT systems that will help the company achieve scale, adopt new decision making frameworks, communications platforms and operational systems that are required for a larger enterprise. These changes may encompass new systems or newly defined processes and policies, but may also include new organizational structures, new decision-making authority, and new communication channels. While these may seem unusual at first, startups in this phase must migrate to platforms and operating models that allow their business to grow and scale and implement the infrastructure and operating models to accommodate rapid growth and scale Companies that fail to anticipate, embrace and implement change, including – defined processes, more intentional organizational design and structure and robust IT infrastructure systems – cannot scale.
‘Leader’-ship requires seeing beyond the current state and into the future. The best leaders look ahead several years and make the often risky, but necessary, decisions that will achieve growth for their company, workforce and industry.
Second Inflection Point
A company’s second inflection point occurs when it reaches approximately 125-150 employees. At this stage, the business is becoming more complex and difficult to manage without clearly defined roles and organizational structures. The company’s founders will often find that there are employees that they do not know, did not hire, and do not interact with on any regular basis. Defined business segments and business functions such as marketing, sales or procurement will form and have definitive leaders and teams. There are new demands for greater infrastructure and data alignment to specific functional and business process needs that the company’s existing systems simply cannot support. Companies assess basic ERP and CRM systems, and Human Resource management becomes a significant challenge.
Founders and the original team of senior executives take on more formalized roles, and work becomes more siloed and segmented as specialists are hired to lead functional areas such as marketing, operations or production. Increasingly, the need for a true “operator” becomes apparent within the executive leadership team – a person with demonstrated experience running a large organization may be introduced as a Chief Operating Officer to start formalizing structures, workflow, strategy and expectations about the way the company must now operate as it scales.
During this inflection point, a young company is maturing, taking on structure and formalizing how it operates through organizational hierarchies, more defined processes and simple enterprise systems. The company’s founders and legacy executives must delegate more work to specialized teams, and work responsibilities become far more segmented.
Third inflection Point
The third inflection point occurs when a company reaches approximately 500 employees. At this point, the company is solidly mid-sized, complex, and likely operating in multiple locations with operations or suppliers and vendors in foreign countries and the workforce is highly distributed. This increased complexity requires a management with deep experience in key functions or processes, and a formal executive leadership team is fully formed – the emergence of an entire “c-suite” with responsibility for the vision, culture, values, strategic planning and operational oversight of the company. As a robust organizational structure emerges, much more responsibility is delegated to middle managers who define and operate the day-to-day operations of the business.
Increased business complexity often demands more formalized processes and policies. A larger number of customers and suppliers, along with distributed workforce requires enterprise computing systems. As the company grows and executive management is increasingly removed from day-to-day operations, data about the business in the form of dashboards and KPIs become vital for executives to understand how the company is performing.
At this inflection point, effective communication becomes vital. In smaller organizations, leaders and founders can easily circulate in-person to share insights and knowledge. As the company grows, older and informal communication methods and networks must be replaced by more structured, consistent and formal communications channels. During this transition, company culture becomes exceptionally important as well. A smaller and more cohesive organization can build and sustain workplace culture more easily than a larger and more distributed organization. Rituals and stories about the company, its history and its culture become very important at this stage.
Similarities among each inflection point
While the growth and challenges that appear during each of the three illustrated inflection points are somewhat different, many factors are called into question at each stage of inflection, such as:
- Leadership
Startups often begin with its founder as the executive leader, then the founder hires experienced operators, devolves responsibility to a C-suite and increases focus on strategy, sales and external relations. Executive leadership morphs and changes through the inflection points, and more experienced leadership in specific functions or processes enter the business.
New leadership entering the business from the outside can place exceptional burdens on the founder or senior leader, who may need to manage the expectations of legacy personnel with expectations of taking on leadership roles as the company as their tenure grows. While existing employees may understand the organization and its mission, they may not possess the skills necessary to grow the company and achieve the vision of the executive team, founder or investors.
- People
The people who started the company and were in important positions during its early stages may or may not become leaders and executives as the company moves through inflection points. This does not mean that the original teams aren’t valuable, just that they may need to find new “seats on the bus” as the company grows and requires more experienced people in key roles. To the best extent possible, it is always important to both retain original team members in new and engaging roles and to hire managers and people with deep experience in complex processes or systems as the company grows. Although legacy personnel retain the culture and purpose of an organization, and are hopefully open to change, new hires bring much needed experience and skills. This is perhaps one of the most significant challenges of company migration.
- Organizational Structure
In a new company, there may be only one or two levels between the founder or CEO and the most junior member of the team. The founders are often hands-on in all aspects of day-to-day work. As companies grow, more formal organizational structures and hierarchies must be implemented. While various organizational hierarchies and management styles and theories exist, it is inevitable that the organization will become more structured and somewhat more complex to accomplish all of the work that needs to be done.
Implementing organizational structure and placing people in roles that are right for them can be exceptionally difficult, especially for legacy employees. Their familiarity with the senior leadership and their close involvement and relationships with the original leadership don’t necessarily lead to senior roles in the organization as the company grows. Many may feel slighted that they are now several levels removed from the leadership team as organizational structure is implemented, or feel limited in new, more discrete roles after wearing a number of hats previously.
- Processes
Few companies begin operations with detailed and carefully mapped business processes and policies because usually only a handful of people doing the work know what needs to be done. As the company grows and operations become more complex and segmented, processes and policies must be carefully defined, and as new opportunities or growth demands change, processes and policies must be continually rethought and reworked.
It is vital as a company grows that well-known but informal processes are reviewed, revised, and documented. While a small team may have thrived with less formal process definition, as a company builds functional teams and business units, work that spans across several job functions and operational teams must be defined and their responsibilities carefully mapped, or the organization will never operate efficiently.
- IT Systems
Many Startups operate with very simple systems, often a handful of spreadsheets and a simple financial application. As work becomes more challenging and data demands increase, a formal IT organization must be built or outsourced, and more robust systems and data management must be implemented to support the current business and to enable growth in the future.
IT systems rely to a great extent on documented work processes, so the concept of robust IT systems moves hand-in-hand with the concept of well-defined processes. This is especially true as a company adopts enterprise systems rather than functional or point solutions.
- Data
This is a feature that has become far more important in the last few years. Many CEOs, early stage investors, and VC and PE firms want to see data to assess a company’s potential to consistently achieve operational efficiency, scale, margin, market share, etc. As a small startup, most of that management data is held by a few people, and easily generated from basic IT systems. As a company grows and moves through inflection points, getting the right data about the operations to the right people at the right time becomes especially important. It is often the requirement for more insightful and accurate data that drives the need for improved information systems.
- Communication
Startups and small companies do not need formal communication programs because everyone interacts regularly, in person and online. As companies grow, founders and new executives must develop meaningful ways to communicate company goals, news, and other information to the rest of the organization. Since growing companies have a lot of change and uncertainty, communication becomes a vital way to retain the mission and values and to keep people informed of all the changes that a company must go through as it grows and changes.
Change at an inflection point
Another factor to consider when approaching an inflection point is the nature of the organization and how well it is prepared for change. People and organizations often grow familiar with the status quo versus the uncertainty that change brings, and while they may notice challenges in the way a company is operating as it grows, they may resist change. Inflection points, by definition, will create a significant amount of change, in all of the factors that have been cited (leadership, people, processes, systems and so on) and a lot of this change happens simultaneously, rather than in a serial manner.
This fact means that organizations going through inflection points need to manage change effectively, understanding how change will be viewed by the employees, who feel uncertain or threatened by change and where the changes will be most dramatic. To help employees through the change in an inflection point, it is important that they see the importance and value of the change, understand that their company’s executive team is fully behind the need for change, and that there is a better outcome for the individual and the business once the change is complete.
Regardless of how many factors need to change at an inflection point, there are likely to be several concurrent changes over a relatively short period of time, so thoughtful change management and communication strategies and programs to support and educate the workforce are vital for success.
The other side of the inflection point
Once a company focuses on the key factors that must change to continue to grow and to build its systems and processes to achieve future growth, it is time to stop and take stock. Implementing a significant change process, updating or implementing systems, putting people in new roles, designing business processes and starting to work in new ways is a bit daunting at first. It will take time for such new structures and processes to settle in and for people to become accustomed to their new roles. In effect, going through an inflection point is very similar to the old saying of “repairing the plane while it is flying.” That’s because customer demands and competitive threats don’t slow down while you are going through the inflection point, so the business must morph and change while continuing to deliver excellent services and products to customers. Once on the other side of an inflection point, the teams and systems may be a bit exhausted, and feel like they have been through a marathon. So, it is important to set out with a refreshed vision and demonstrate that the new business models, processes, and systems position the company well for future growth.
Conclusion
Inflection points are a signal that your company is growing and reaching a state where the original structures and processes should be reconsidered. Reaching an inflection point is a success metric for a business, indicating that it is growing and succeeding. Inflection points can also present quite a challenge, because they require your management team to rethink and reconsider a number of important factors that make up how the business operates, and to impose change. When the inflection point is carefully considered, and factors like the role of existing leadership, the state of processes and systems, and the nature of the organizational hierarchy are considered and revised, a company can reposition itself for future growth. When an inflection point is reached but the necessary changes are overlooked or ignored, further growth becomes very difficult.
Understanding when your company is approaching an inflection point and preparing your team for the necessary changes is vital for continued growth. While these changes can be challenging and require multiple changes to people, processes, and systems all at once, the outcome positions the company to accelerate into a new stage of growth.
Jeffrey Phillips, Principal Consultant, in CREO’s Strategy Development & Insights practice helps companies navigate through inflection points. Visit creoinc.net to learn more.
